Borrowing costs for European banks have risen sharply this year amid the sovereign debt crisis, but it was unclear how Australian banks would be affected, a senior Reserve Bank of Australia (RBA) official has said.

RBA assistant governor for financial markets Guy Debelle has told a financial conference in Sydney that European banks are charging higher interest rates to lend to each other, the highest since the collapse of US investment bank Lehman Brothers in September 2008.

Australian banks are in better shape than their European counterparts because they fund more of their loans from customer deposits, although there has been some increase in bank-to-bank lending rates, Mr Debelle says.

"Because deposit growth remains rapid, you're seeing some of the deposit rates come down rather than up, so that source of pressure is actually easing," he told the conference.

"On the lending rate front, you've actually seen a number of fixed interest-rate loans come down both for mortgages and corporate lending as well.

"You've actually seen some reduction there."

He says it is hard to predict whether Australian banks will have to raise interest rates, but the RBA would take the situation in Europe into account.

"And part of it comes to the point as to where you think things are going to go over the next little while, which I think is very difficult to say."

Mr Debelle would not comment on the chance of a cut in official rates on Melbourne Cup day next month.

Outlook 'improving'

Minutes from the latest meeting of the central bank show it left rates on hold this month because of the slowing local economy, the falling Australian dollar and share market volatility.

The RBA said the inflation outlook was less concerning now compared to a few months ago.

Mr Debelle says local banks have been shielded from the problems in Europe because they can borrow money from US investment funds.

European banks have been shut out of international money markets because lenders are worried they will not get their money back.

But Mr Debelle says central banks have been alleviating some of the funding pressures faced by European banks.

As a result, more European banks have been borrowing euros from the European Central Bank (ECB) to fund their loans.

The ECB's short-term lending to banks has increased by 40 per cent since April this year after it expanded its loan programs, Mr Debelle says.

Greece and Ireland have been relying heavily on ECB loans for the past couple of years, with 20 per cent of Greece's loans were now funded by the ECB.

ECB loans to France jumped in August, and borrowing by Spanish and Italian banks also has increased.

'It's political'

It was hard to predict when there would be a deal on the European Financial Stability Facility (EFSF), but Mr Debelle expected a result soon.

"I think the situation is going to come to a head in Europe sometime in the fairly near future one way or the other," he said.

"But I think that is completely unpredictable because ultimately it's a political decision and trying to predict political decisions in Europe, where you've actually got to predict 17 political decisions at least, is close to impossible."

German chancellor Angela Merkel said overnight that this weekend's European Union summit in Brussels would be an important step but would not solve the debt crisis.

"These sovereign debts have built up over decades, so they won't be ended with one summit," Mrs Merkel told reporters in Berlin.

A report by British newspaper The Guardian said that Germany and France had agreed to increase the size of the EFSF to around two trillion euros ($2.68 trillion).

Credit ratings agency Moody's has downgraded Spain's government bond rating by two levels to A1, citing high levels of debt in the banking and corporate sectors.

Moody's also told France that its AAA investment rating was on notice because of its exposure to troubled European countries.